Volcom Sold by Kering to Authentic Brands Group, Kind Of.

The title of the press release is “Authentic Brands Group Acquires Volcom.”  Well, not exactly.  The Authentic Brands Group (ABG) press release goes on:

“…ABG has taken a minority stake in Liberated Brands, the newly-formed operating company for Volcom. Todd Hymel and Volcom’s current management team have taken the majority stake in Liberated Brands and will maintain the Volcom operations based in the U.S., France, Australia and Japan with continued oversight of the brand’s product development, athlete marketing and its retail and wholesale businesses worldwide. ABG will focus on amplifying brand awareness and business development for Volcom while leveraging Liberated Brands’ specialized retail and wholesale operations as a platform for international expansion of complementary ABG-owned brands.”

Details are lacking, but here’s how I’d describe the transaction from the little I know.  The Volcom management, lead by Todd Hymel, wanted to buy Volcom from Kering.  Okay, let’s stop for a little history and a few numbers.

It was on June 24, 2011 that Kering (then known as PPR) completed the acquisition of Volcom.  The purchase price was $607.5 million.

December 31, 2010 is the last of the full year financials we have for Volcom as an independent public company.  In that year, it had revenue of $323 million, operating income of $30.4 million, and net income of $22.3 million.  PPR, then, paid 20 times operating income.  Big number, as I think we all thought at the time.

We also have a final 10Q for the quarter ending March 31, 2011.  The balance shows cash of $90 million, no long-term debt, and a current ratio of 7.3.  So a rock-solid balance sheet.

I wrote at the time that Volcom did a great job selling from a position of strength rather than when then needed to find a buyer.  Here’s part of what I said.

Over the last year, and maybe more, we’ve noticed that Volcom has had some issues with too much inventory and has had to discount to move it. We see the receivables increase and the allowance for bad debt that’s more than 10% of receivables. We note their comments (like other companies) about issues with rising costs and deliveries.

I’ve written about what a great job Volcom has done in defining and owning their market space, but how it can be hard for a company to grow out of a market position it is so closely identified with. Related to that I’ve noted some of the apparent challenges the brand has had in the department stores.

Volcom’s management didn’t need to sell the company. But if I and others have noticed some of these issues, you know Volcom’s spent a whole lot of time figuring out how to manage them. Apparently, the conversation with PPR took place over a year. With its balance sheet strong, and the brand’s integrity intact, I suspect Volcom looked at the strategic issues I’ve highlighted above and decided it was a good time to negotiate from a position of strength. That’s how you’re supposed to handle the market issues that lead to consolidation.

The limited information we got about Volcom from Kering told us Volcom wasn’t performing even close to a way that could justify the purchase price.  Kering’s decision a year ago to sell it confirms that.  Here’s what a Fashion United article from April 2 said.  “Volcom’s results, impacted by headwinds, still account for a considerable portion of the turnover. In 2017, its turnover was 230 million euros, down 3.2% at constant currencies, compared to 242 million euros in the prior year. Its operating income was stable.”  230 million euros is about $258 million at current exchange rates, well off the $323 million of 2010.

I imagine part of the issue was that Kering didn’t understand what they’d bought and how to manage it.  Sounds a bit like Deckers’ acquisition of Sanuk.  The other piece was that Volcom had a market position it proved hard to expand without damaging the brand.

Okay, back to the present.  Todd and his team set up Liberated Brands to be the operating company for Volcom.   ABG has a minority stake in Liberated- that’s up to 49%.

Kering, we know, spent a year looking for a buyer but ended up selling it to the management group.  My experience is that management groups don’t typically pay the highest prices, if only because they don’t have a lot of money to pay.  And they are hell to negotiate with because they know everything about the brand and it’s prospects.

But we have no details.  Pretty sure Kering got less than the $607.5 million they paid.  A lot less.  Maybe the minority interest that ABG purchased covered it.  Perhaps Kering took back a note for part of the price or kept a piece of equity themselves.  I would expect the Volcom team put up some money but have no idea how much it might have been (or not been).  Many structures are possible.

Regular readers know I’ve been saying for years (decades?) that many brands that were public or part of a public company were better off private. They can focus on the bottom line and brand positioning rather than on revenue growth.  Often, their potential depends on just how used, screwed and abused they were while public.

From the quote in the press release, the Volcom management team is going to “…maintain the Volcom operations…with continued oversight of the brand’s product development, athlete marketing and it’s retail and wholesale business worldwide.”

Meanwhile, “ABG will focus on amplifying brand awareness and business development for Volcom while leveraging Liberated Brands’ specialized retail and wholesale operations as a platform for international expansion of complementary ABG-owned brands.”

Okay, it’s time for a visit to ABG’s web site.  Scroll down that page a bit than look at the number of brands/stores/partners they have.  You’ll see where it says, “We are brand owners, curators, guardians.”  Next, take a look at What We Do to get a sense of the brands they are involved with.

Next, let’s move on to Our Business where you can see the kind of relationships they have with brands.  Finally, check out Who We Are, where you’ll see a group of very experienced executives lead by Founder, Chairman and CEO Jamie Salter.

I know nobody better than Jamie at management of distribution and making money out of brands that have lost some part of their luster.  When it comes to brand management, he’s always been able to get blood from a stone, and I think I’ll just leave that one lying there.

Let’s assume for a minute that I’m right in thinking the Volcom brand might have suffered some damage as part of Kering.  Typically, part of the solution for the buying group, as long as there’s brand credibility left, would be to pull back distribution as part of reestablishing the brand.  ABG plans, as you see in the quote, to place some of its brands into Volcom retail channels.  Pretty clearly, some to many of those brands don’t belong with Volcom.  That will be especially true if part of Volcom’s new strategy is a pullback in distribution.

As this all evolves, it will be interesting to see the extent to which Volcom and ABG management are aligned.  You can see how the expectations of Volcom management might be in conflict with ABG.

8 replies
  1. Mark Miller
    Mark Miller says:

    I may have read it wrong, but I thought ABG purchased the IP in its entirety and also holds a minority stake in Liberated Brands which is the master licensee & operating company?

    • jeff
      jeff says:

      Howdy Mark,
      Nope, you’re right. Now, if you can explain to me just how exactly that will all work, I’ll be grateful. What value is there in Liberated Brands if all the IP, which I kind of see as 100% of the value, is all held by ABG?
      Thanks,
      J.

  2. Abercrombe Ian Fitch
    Abercrombe Ian Fitch says:

    Puzzling lack of detail here which suggests someone is hiding something. ABG takes “minority interest” in Newco that is “Operating Company” but no mention of who owns the brand, suggesting they bought all of the IP and are licensing it to an affiliate where they are also the primary investor and significant owner. If not, then there is a missing third player here (who is not management) who put up the money to make this all work. My money was always on Steris to find a PE firm to finance him to buy it back, or even Wooly to do the same, so to see Todd at the helm was a bit of a surprise, but a good move for ABG as this brand will need all of the “core” legacy it can assemble to try to regain its foothold. “Youth Against Establishment” will always be one of the best tag lines and mission statements in the business, and at its peak, they did this very well. I’ll always root for the brand but I suspect ABG will look to go “down and wide” with distribution to recoup its investment, rather than the core distribution that made it cool.

    • jeff
      jeff says:

      Hi AIF,
      Well, there’s a lot that’s not clear but, as you know, they are under no obligation to explain. Kind of feels like some more information would have helped them put their best foot forward. Somebody suggested there might be some tax benefits to the set up. I basically don’t understand two major things: First, how ABG’s current brands will work within the Volcom distribution system, as described in the press release in one insufficient sentence. Second, I don’t understand how that can work to recover more of Volcom’s credibility as a brand with it’s original target market if that kind of mixing and mingling is going to occur or why the existing Volcom management team would want anything to do with it.

      Basically it all comes down to just what is the brand’s current level of credibility/reputation in the market. At the price they paid (whatever that is-some have said $250 to $300 million which seems high to me), can they hope for a reasonable return on investment if they take the “core” route, which I suspect would take cutting back on distribution, spending some marketing money, and being patient. I’d just like to know that ABG and Volcom managements are alligned.
      Thanks for the comments,
      J.

  3. Pat Fraley
    Pat Fraley says:

    Maybe the plan is for Liberated Brands to build a multi brand portfolio, using Volcom as the foundation of the business, and allowing the management team to get equity in something. Otherwise, what would be the point if ABG owns 100% of the IP?

    • jeff
      jeff says:

      Pat, your guess is as good as mine. Take a look at the ABG portfolio of brands and see which ones you think somehow belong with Volcom. I don’t understand how the Volcom management team benefits either.
      Thanks,
      J.

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